Ian Contributes $9,000 in Exchange for a 30 Percent Interest

question 65

Multiple Choice

Ian contributes $9,000 in exchange for a 30 percent interest in a C corporation. For 2017, the corporation reported a total loss of $35,000 and made no cash distributions. For 2018, the corporation reported net income of $45,000 and made a cash distribution to the shareholders. Ian received $5,000 of this cash distribution in 2018. Ian is in the 24% marginal tax bracket and 15% dividend rate in both 2017 and 2018. How much income tax did Ian save for 2017 as a result of his share of loss from this corporation and how much income tax does Ian pay as a result of his ownership in the corporation for 2018?

• A) zero tax savings in 2017 and $750 tax in 2018
• B) zero tax savings in 2017 and $3,360 tax in 2018
• C) $2,520 tax savings in 2017 and $3,360 tax in 2018
• D) $2,520 tax savings in 2017 and $2,550 tax in 2018
• E) $2,940 tax savings in 2017 and $3,780 tax in 2018

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Definitions:

Assets

Resources owned by a company that have economic value and can be converted into cash.

Liabilities

Financial obligations or debts that an entity owes to others, which must be settled over time through the transfer of economic benefits including money, goods, or services.

Debits

Entries in accounting that represent an increase in assets and expenses or a decrease in liabilities, equity, and revenue.

Credits

Represents the amount of money or value added to an account or available for purchase on credit.